Global equities took a slight breather during the shortened trading week, after a sharp rally at year-end and new record highs for all three major U.S. Indexes – Dow, NASDAQ and the S&P 500 on the first trading day of the year. Concerns over rising tensions between the U.S. and Iran emerged on Friday following a U.S. airstrike in Iraq that killed a prominent Iranian general. Heightened geopolitical risk in the Middle East caused crude oil prices to rise 3% following the news. President Trump offered a partial explanation of his decision on Twitter on Friday, writing that Soleimani “killed or badly wounded thousands of Americans” and “was plotting to kill many more.”
Chinese stocks recorded their fifth weekly gain after the country’s central bank lowered the amount of cash that lenders must hold in reserve. On Wednesday, the People’s Bank of China (PBOC) said that it would cut the reserve requirement ratio (RRR) for financial institutions by a half-point, effective January 6. The reduction in the RRR would release roughly 800 billion yuan ($115 billion) into the financial system, the PBOC said.
Optimism about a pending interim U.S.-China trade deal also supported emerging market sentiment. On Tuesday, President Trump tweeted that he would sign a phase one trade deal at the White House on January 15. Details of the agreement remain scant, however, and Chinese officials have yet to confirm the signing date.
For the week, global equities were generally softer. In the U.S., the Dow Jones (-0.04%), S&P 500 (-0.16%) and Nasdaq (+0.16%) were largely flat. Similarly, in Europe the Euro Stoxx 50 (-0.24%) and FTSE 100 (-0.29%) were slightly softer. Asian markets were mixed with the Nikkei 225 (-0.76%) weaker against a strong Shanghai Composite Index (+2.62%).
Market Moves of the Week
The JSE All Share Index ended the week stronger (+0.65%), with resources (+1.65%) and industrials (+0.68%) firmer and financials (-0.51%) weaker.
Chart of the Week
With geopolitical tensions back at the fore for market participants after the killing of a top Iranian commander in a U.S. airstrike, it’s necessary to think about the ways in which this could have an enduring impact on markets. Beyond raising risk premiums generally, one conduit for market turbulence is inflation – in this particular instance, potentially through higher oil prices, which could impact headline price pressures and crimp spending on other discretionary items. Whether inflation surprises to the upside this year – for whatever reason – it could upset the apple cart of the currently low global inflation environment.
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